By Dr. George Calhoun
Executive Director of the Hanlon Financial Systems Research Center at Stevens Institute of Technology
The jobs number – officially known as “nonfarm payroll employment”– is released monthly by the Bureau of Labor Statistics. It is said to have a greater impact on financial markets than any other economic indicator, and it is a critical input to the formation of monetary policy at the Federal Reserve.
“Trillions of dollars in global assets reprice within moments of a BLS release,” The Economist wrote last week. “It is a puzzle why this month’s revisions were unusually large.”
It is also quite flawed. The initial estimate is released in a hurry each month — earlier than any other major metric — and it is always incomplete. The collection period is very short and typically one third of the desired inputs are missing from the first report. The BLS relies on survey procedures that are outdated, and response rates are dropping rapidly. In the most important poll, nearly 60% failed to respond. The initial estimate is revised at least four times over the following two years as further information trickles in, but the revisions are highly volatile and fail standard statistical tests for precision.
These facts have been quite well-known among insiders. The BLS’ methodology is in need of an overhaul. As recently as July, a bipartisan group of 88 prominent economists and policy leaders addressed an open letter to Congress that called for major changes –highlighting the need to adopt more modern, technologically sophisticated approaches to data collection and analysis.
This month the problem burst into our mainstream consciousness. The BLS issued an unexpected 90% downward revision in its most recent jobs estimates, erasing hundreds of thousands of jobs from its own previous count and shaking the financial markets and significantly altering the calculus on prospective monetary policy moves by the Federal Reserve.
In response, President Trump fired the head of the BLS and ignited a political furor.
The immediate political controversy is less important than the question of how to address the institutional and methodological shortcomings of the BLS. The agency’s product has been considered as the gold standard for economic data, allegedly the best in the world, trusted by investors and closely attended by the Federal Reserve. But its deficiencies are increasingly evident, which puts that trust at risk. The real problem on the table now is what should be done to shore up this institution, improve its deteriorating performance, and restore its reputation.
Jobs Shock
On Aug. 1, the BLS issued a large downward revision of its estimate for the number of new jobs created in May and June. The original estimate for May was cut by 87%. The June estimate was cut by 90%.